monte carlo simulations

Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables.

commentary

By randomly selecting and reordering historical investment returns, and by repeating this process many hundreds of times, Monte Carlo simulations can illustrate the probability of various terminal portfolio values in the future. Based upon historical data, the odds of outcomes, such as the odds of complete depletion of a portolio over a period of time, can be calculated. Because it illustrates variability and uncertainty, it is a more realistic view of the future than a straight-line projection.